[Federal Register Volume 72, Number 66 (Friday, April 6, 2007)]
[Rules and Regulations]
[Pages 16987-16990]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-6473]


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FEDERAL RESERVE SYSTEM

12 CFR Part 204

[Regulation D; Docket No. R-1262]


Reserve Requirements of Depository Institutions

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final rule.

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SUMMARY: The Board of Governors is revising its 1980 interpretation of 
Regulation D (Reserve Requirements of Depository Institutions) setting 
forth criteria for the ``bankers' bank'' exemption from reserve 
requirements. The interpretation sets forth the standards that the 
Board uses in applying the statutory and regulatory requirements for 
the bankers' banks exemption to specific institutions. The revised 
interpretation specifies that the Board may determine, on a case-by-
case basis, whether certain entities not already expressly listed in 
the interpretation may become customers to a limited extent of bankers' 
banks that remain exempt from reserve requirements.

DATES: Effective Date: May 7, 2007.

FOR FURTHER INFORMATION CONTACT: Heatherun Allison, Senior Counsel, 
(202) 452-3565; or Kara Handzlik, Attorney, (202) 452-3852, Legal 
Division, Board of Governors of the Federal Reserve System, Washington, 
DC 20551. For users of Telecommunications Device for the Deaf (TDD) 
only, contact (202) 263-4869.

SUPPLEMENTARY INFORMATION:

I. Statutory Background

    Section 19(b) of the Federal Reserve Act (Act) imposes reserve 
requirements on certain deposits and other liabilities of depository 
institutions for monetary policy purposes. 12 U.S.C. 461(b). The 
Board's Regulation D, ``Reserve Requirements of Depository 
Institutions'' (12 CFR part 204), implements Section 19(b). Section 
19(b)(9) of the Act, commonly referred to as the ``bankers' bank 
exemption,'' exempts from reserve requirements certain institutions 
that would otherwise be subject to them. Specifically, Section 19(b)(9) 
provides that reserve requirements ``shall not apply with respect to 
any financial institution which--(A) is organized solely to do business 
with other financial institutions; (B) is owned primarily by the 
financial institutions with which it does business; and (C) does not do 
business with the general public.'' 12 U.S.C. 461(b)(9). ``Bankers' 
banks'' for purposes of Section 19(b)(9) of the Act and Regulation D 
include bankers' banks for commercial banks and thrifts chartered under 
state or federal law authorities as well as corporate credit unions.

II. Issuance of Original Interpretation

    In November 1980, the Board issued an interpretation of Regulation 
D specifying certain standards to be used in determining whether 
institutions qualify for the bankers' bank exemption from reserve 
requirements. 12 CFR 204.121 (Interpretation). Under the 
Interpretation, an institution may be regarded as ``organized solely to 
do business with other depository institutions even if, as an 
incidental part to [sic] its activities, it does business to a limited 
extent with entities other than depository institutions.'' Id. In 
addition, a depository institution will be regarded as ``being owned 
primarily by the institutions with which it does business'' if ``75 per 
cent or more of its capital is owned by other depository institutions * 
* * regardless of the type of depository institution.'' Id.
    Finally, the Interpretation states that a depository institution 
will be regarded as ``not do[ing] business with the general public'' if 
the depository institution has satisfied two requirements. First, the 
depository institution must limit the range of customers with which it 
does business to: depository institutions; subsidiaries or 
organizations owned by depository institutions; directors, officers or 
employees of the same or other depository institutions; individuals 
whose accounts are required at the request of the institution's 
supervisory authority due to the actual or impending failure of another 
depository institution; share insurance funds; and depository 
institution trade associations. Second, the depository institution's 
loans to or investment in that range of customers (other than 
depository institutions) cannot exceed 10 percent of total assets, and 
the extent to which it receives shares or deposits from or issues other 
liabilities to those same entities (other than depository institutions) 
cannot exceed 10 percent of total liabilities or net worth. Id.

III. Proposed Revisions

    On August 14, 2006, the Board published for comment a proposal to 
revise the Interpretation to specify that

[[Page 16988]]

the Board may determine, on a case-by-case basis, whether certain 
entities not already expressly listed in the Interpretation may become 
customers to a limited extent of bankers' banks. (71 FR 46411.) This 
proposal was issued pursuant to Section 19(a) of the Act, which 
authorizes the Board to define the terms used in that section and to 
prescribe such regulations as it may deem necessary to effectuate the 
purposes of the section and to prevent evasions thereof.
    The Board proposed to amend the Interpretation by adding to the 
list of non-depository institution customers with which bankers' banks 
may do business and remain exempt from reserve requirements the 
language ``and such others as the Board may determine on a case-by-case 
basis consistent with the purposes of the Act and the bankers' bank 
exemption.'' The proposal would require that such customers still be 
subject to the percentage limitations specified in the Interpretation 
relating to ownership and doing business (i.e., not more than 25 
percent of bankers' bank capital may be owned by non-depository 
institution customers and bankers' bank business with non-depository 
institution customers may not exceed 10 percent of total assets/
liabilities). The Board did not propose to specify any standards under 
which it would make such case-by-case determinations. The proposal 
stated, however, that the Board would not expect to exercise the 
authority under the proposal to expand the range of permissible 
bankers' bank customers to include the general public. The proposal 
also stated that the Board expects to obtain more experience over time 
with requests for determinations under the proposal and, based on that 
experience, may find that proposing further amendments to the 
Interpretation (such as specifications or standards by which the Board 
would make such determinations) are warranted. Comment was solicited on 
all aspects of the proposal.

IV. Analysis of Comments

Overview of Comments Received

    The Board received seventeen comments on the proposal. Commenters 
included five bankers' banks (including corporate credit unions); five 
associations or councils representing bankers' banks, corporate credit 
unions, or community banks; two individuals not associated with any 
institution, one professor, one bank, one credit union, one financial 
holding company, and one bank holding company. Two commenters fully 
supported the proposal, while eleven commenters supported the proposal 
but raised concerns and/or offered suggestions about various aspects of 
the proposal. Three commenters opposed the proposal. One commenter did 
not address the issue set forth by proposal but instead commented on a 
separate aspect of Regulation D.\1\
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    \1\ This commenter was concerned with Sec.  204.2(d)(2) of 
Regulation D (12 CFR 204.2(d)(2)) and ``how consumer banking 
institutions are interpreting the Regulation to allow them to 
collect `excess transaction fees' from banking patrons.''
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A. Structure of Bankers' Banks; Competitive Concerns
    A few commenters favored the flexibility that would be given to the 
Board so that the Board could allow banks to structure their operations 
optimally and increase services to the financial community. Many 
commenters, however, were concerned that the proposal would erode or 
eliminate the unique characteristics of a bankers' bank. Some of these 
commenters stated that adopting the proposal would increase competition 
between bankers' banks and their bank customers. These commenters 
emphasized that bankers' banks are not established to compete with 
community banks, but instead established to do business with community 
banks.
    One commenter stated that the bankers' banks should not be 
permitted to increase their activities to the point where the bank 
clients and shareholders of bankers' banks perceive these activities as 
directly competing with their own interest. This commenter stressed 
that the term bankers' bank should be ``restricted to banks [that] have 
chosen to be owned by banks, to offer services only to other banks and 
to embrace the concept of serving only community banks so that they in 
turn can compete effectively with the largest financial institutions.'' 
On the other hand, two commenters suggested increasing the extent to 
which bankers' banks could do business with non-depository institution 
customers while remaining exempt from reserve requirements. These 
commenters urged the Board to increase the percentage limitations 
specified in the Interpretation relating to ownership and doing 
business.
    The Board believes that adopting the proposal is not likely to 
erode the unique characteristics of bankers' banks. The Board cannot 
under Regulation D authorize activities that are not authorized by a 
bankers' bank's chartering authority; rather, the Board can determine 
only whether a bankers' bank may be exempt from reserve 
requirements.\2\ Any given bankers' bank activity or customer must be 
authorized by the bankers' bank chartering authority before the Board 
can consider whether a bankers' bank may remain exempt from reserve 
requirements while undertaking such an activity or serving such a 
customer. In addition, as stated in the proposal, the Board does not 
anticipate permitting the reserve exemption to apply to a bankers' bank 
that does business with the general public.
    The Board is not revising the percentage limitations on the extent 
to which bankers' banks may serve non-depository institution customers 
while remaining exempt from reserve requirements. The Board does not 
believe that it is appropriate to increase those percentage limitations 
because to do so would reduce the extent to which bankers' banks serve 
primarily depository institution customers. Any new non-depository 
institution customers that would be permitted under the revised 
Interpretation will still be subject to the existing percentage 
limitations specified in the Interpretation relating to ownership and 
doing business.
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    \2\ For a bankers' bank that is a state member bank, the Board 
would have to approve any change in the general character of its 
business or in the scope of the corporate powers it exercises in 
accordance with Section 208.3(d)(2) of Regulation H (Membership of 
State Banking Institutions in the Federal Reserve System, 12 CFR 
part 208).
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    Finally, the purpose of reserve requirements under Section 19 is to 
facilitate the conduct of monetary policy. Accordingly, the Board 
believes that exemptions from reserve requirements are to be narrowly 
construed so as not to impede the effective conduct of monetary policy. 
The more a bankers' bank's activities resemble those of a commercial 
bank or other depository institution, the less appropriate the reserve 
requirement exemption would be for that bankers' bank. The Board 
believes that these considerations will keep the bankers' bank 
exemption from reserve requirements from undue expansion under the 
revised Interpretation.
B. Determination Process
    Some commenters raised concerns about the process by which the 
Board would make determinations under the proposal. Many of these 
commenters suggested that the Board publish requests for determinations 
and permit public comment on them. Among the commenters' reasons for 
this request was so that bankers' banks chartered by other authorities 
could concomitantly seek authorization of the same activities.

[[Page 16989]]

Other commenters urged the Board to disclose the business reasons 
giving rise to requests for determinations as well as the Board's 
reasoning in granting any such requests. A few commenters asked that 
the Board issue its determinations in the form of an order. These 
commenters argued that this would afford the bankers' bank industry the 
opportunity to learn the ``business rationale and the business 
opportunity'' contained in such requests and orders until formal 
guidelines have been established by the Board.
    One commenter asked that the Board clearly set forth in the revised 
Interpretation the standards which will be used in making its future 
case-by-case determinations to preclude arbitrary or capricious 
determinations. On the other hand, another commenter urged the Board to 
relax standards for granting such requests and to clarify whether all 
entities with which the bankers' bank is permitted to do business under 
the Interpretation will qualify as ``financial institutions.''
    One commenter urged the Board to specify the length of time for 
making determinations under the revised Interpretation, claiming that 
the flexibility granted by the proposal could be offset by overly 
lengthy determination time periods. This commenter also urged the Board 
to address the extent to which individual Federal Reserve Banks will be 
involved with the decision making process, asserting that the 
individual Reserve Banks are in the best position to develop 
understanding of a company's risk profile and management team which is 
necessary for making such determinations.
    The Board anticipates that determinations under the revised 
Interpretation will generally be made public and will include a 
description of the determination, the business and other reasons behind 
the request, and the Board's reasoning in granting (or denying) the 
request. Although the Board does not anticipate publishing requests for 
such determinations prior to the time that the determination is made, 
the Board anticipates that all requests will be handled in a timely 
manner and that the input of the appropriate Federal Reserve Bank or 
Banks, if any, will be solicited as part of that process.
    Finally, the Board continues to believe that publishing more 
detailed criteria by which the Board would review requests under the 
revised Interpretation would be premature at this time. As noted above, 
the Board cannot under Regulation D authorize activities that are not 
authorized by a bankers' bank's chartering authority. The Board cannot 
predict the kinds of changes that may or may not occur in activities or 
customers that chartering authorities may permit. Accordingly, the 
Board cannot predict the details of the criteria under which it would 
evaluate such activities or customers for consistency with the Act and 
the purposes of the bankers' bank exemption. Over time, however, the 
Board expects that it may be possible after further experience with 
requests under the Interpretation to articulate standards or guidelines 
for the further exercise of that authority by the Board.
C. Miscellaneous
    One commenter supported the proposal, but asked for clarification 
of the ``consistent with the purposes of the Act and the bankers' bank 
exemption'' language. Another commenter asked the Board to clarify the 
phrase ``do business with'' as that phrase appears in the Act and the 
Interpretation. As noted above, the Board believes that it cannot 
predict the manner in which chartering authorities may change the 
permissible activities and customers of bankers' banks. Therefore, the 
Board believes that it cannot at this time provide greater specificity 
in these areas. As also noted above, however, the Board expects that it 
may be able to provide greater specificity in the future as an 
increasing amount of experience with requests and determinations under 
the proposal is obtained.
    One commenter supported the proposal but believed that the Board 
inadvertently removed language from the original Interpretation when 
issuing the proposal for comment. The Board has corrected this 
inadvertent omission in the final Interpretation.
    Another commenter suggested that adopting the proposal would make 
the regulation less specific and that this could impair any relief 
granted to bankers' banks by adopting the proposal. This commenter also 
stated that the proposal violates ``Plain Language'' provisions of the 
Gramm-Leach-Bliley Act (Section 722 of Pub. L. 106-102, 113 Stat. 1338, 
1471 (Nov. 12, 1999)). Finally, this commenter argued that the proposal 
provides such expansive authority to the Board that there can be little 
Congressional oversight of the Board's activities in this area. As 
noted above, the Board cannot itself expand bankers' bank authority to 
serve new kinds of customers and undertake new lines of activities. As 
also noted above, the Board believes that it can only issue 
determinations under the revised Interpretation that are consistent 
with the purposes of Section 19 of the Act and of the bankers' bank 
exemption, and that the revised Interpretation clearly states the 
Board's authority and objectives. As also noted above, the Board does 
not anticipate exercising its authority under the revised 
Interpretation to expand the reserves exemption to bankers' banks that 
do business with the general public. As further noted above, the Board 
anticipates that determinations made under the revised Interpretation 
will be publicly available. For these reasons, the Board does not 
believe that the Interpretation poses the risks or violations suggested 
by the commenter.

V. Regulatory Analysis

A. Regulatory Flexibility Act

    In accordance with Section 604 of the Regulatory Flexibility Act 
(RFA) (5 U.S.C. 601 et seq.), the Board has reviewed the proposed 
amendments to the Interpretation of Regulation D. For the reasons set 
out below, the Board certifies that the amendments to the 
Interpretation will not have a significant economic impact on a 
substantial number of small entities.
    1. Statement of the objectives of the proposal. The Board is 
revising its Interpretation of Regulation D in order to authorize the 
Board to determine, on a case-by-case basis, whether non-depository 
institutions that are not already listed in the Interpretation may be 
bankers' bank customers without the bankers' bank losing its exemption 
from reserve requirements. Section 19 of the Act was enacted to impose 
reserve requirements on certain deposits and other liabilities of 
depository institutions for monetary policy purposes. Section 19 
exempts certain institutions from reserve requirements as ``bankers' 
banks'' provided the institutions meet the characteristics specified in 
the statute. Section 19 also authorizes the Board to promulgate such 
regulations as it may deem necessary to effectuate the purposes of the 
section. The Board believes the revisions to the Interpretation are 
within Congress' broad grant of authority to the Board to adopt 
provisions that carry out the purposes of section 19 of the Act.
    2. Public comments in response to initial regulatory flexibility 
analysis. There were no public comments in response to the initial 
regulatory flexibility analysis.
    3. Description and estimate of number of small entities to which 
revised Interpretation will apply. The Board estimates that there are 
eleven bankers' banks qualifying as ``small entities'' to which the 
revised Interpretation could apply.

[[Page 16990]]

    4. Projected reporting, recordkeeping, and other compliance 
requirements. There are no reporting, recordkeeping, or other 
compliance requirements associated with the revised Interpretation.
    5. Minimizing significant economic impact of the revised 
Interpretation on small entities. There were no public comments that 
suggested a significant alternative that would minimize the impact of 
the proposal on small entities. There are eleven bankers' banks 
qualifying as ``small entities'' under RFA. The revised Interpretation 
provides all bankers' banks with the ability to maintain their 
exemption from reserve requirements, if any, while undertaking certain 
additional bankers' bank activities or customers as authorized by their 
chartering authorities. No bankers' bank is required to seek a 
determination under the revised Interpretation. The revised 
Interpretation imposes no economic burdens on bankers' banks, and 
instead only offers the opportunity to bankers' banks that are exempt 
from reserve requirements to maintain the economic benefits of that 
exemption under the specified circumstances. Accordingly, the Board 
believes that the revised Interpretation will not have a significant 
impact on a substantial number of small entities.

B. Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act (PRA) of 1995 (44 
U.S.C. 3506; 5 CFR part 1320 Appendix A.10), the Board reviewed the 
proposal under the authority delegated to the Board by the Office of 
Management and Budget (OMB). The proposal contains no requirements 
subject to the PRA.

VI. Plain Language

    The Board received one comment on whether the proposal was in plain 
language. This commenter stated that the Board's failure to propose 
standards for its exercise of authority under the proposal amounted to 
a failure to comply with the ``Plain Language'' provisions of the 
Gramm-Leach-Bliley act. This commenter stated that the Board should 
instead say that it proposes to do whatever it wants given its view of 
the purposes of the Act. For the reasons stated above, the Board 
believes that the revised Interpretation is stated in plain language to 
the greatest extent possible at this point in time. As also stated 
above, the Board expects to publish further guidance and standards as 
it obtains additional experience in the future with requests for 
determinations under the revised Interpretation. Accordingly, the Board 
believes that the revised Interpretation complies with applicable plain 
language requirements.

List of Subjects in 12 CFR Part 204

    Banks, banking, Reporting and recordkeeping requirements.

0
For the reasons set forth in the preamble, the Board is amending 12 CFR 
part 204 as follows:

PART 204--RESERVE REQUIREMENTS OF DEPOSITORY INSTITUTIONS 
(REGULATION D)

0
1. The authority citation for part 204 continues to read as follows:

    Authority: 12 U.S.C. 248(a), 248(c), 371a, 461, 601, 611, and 
3105.

0
2. The second sentence of paragraph (a)(2)(iii) of Sec.  204.121 is 
revised to read as follows:


Sec.  204.121  Bankers' banks.

    (a) * * *
    (2) * * *
    (iii) * * * First, the range of customers with which the 
institution does business must be limited to depository institutions, 
including subsidiaries or organizations owned by depository 
institutions; directors, officers or employees of the same or other 
depository institutions; individuals whose accounts are acquired at the 
request of the institution's supervisory authority due to the actual or 
impending failure of another depository institution; share insurance 
funds; depository institution trade associations; and such others as 
the Board may determine on a case-by-case basis consistent with the 
purposes of the Act and the bankers' bank exemption. * * *
* * * * *

    By order of the Board of Governors of the Federal Reserve 
System, April 3, 2007.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. E7-6473 Filed 4-5-07; 8:45 am]
BILLING CODE 6210-02-P